UK: Dismissed For Refusing A Pay Cut

In difficult trading conditions employers may be forced to
consider adjustments to pay or bonuses as a means of ensuring the
company's survival. But employers cannot change their
employees' contracts unilaterally (for example by reducing pay)
without a risk of constructive dismissal claims. Even where an
employer has a variation clause in the contract it must still act
reasonably and consult its employees over significant changes,
aiming to obtain their consent. If consent cannot be obtained,
employers may have to force through change by dismissing
recalcitrant employees and offering to re-hire them on new terms.
Plainly this is a risky process.

Two recent cases illustrate how the Tribunals might approach an
unfair dismissal claim where a pay cut has been imposed against an
employee's will.

In Garside and Laycock Ltd v Booth, the company had
been undergoing trading difficulties and had asked all its
employees to accept a 5% reduction in pay. Mr Booth was one of only
two employees of more than 80 who refused to comply and was
subsequently dismissed. He brought a claim to the tribunal,
alleging that his dismissal was unfair. The Tribunal first had to
decide whether there was a potentially fair reason for the
dismissal. It decided that in the circumstances, the company had a
substantial reason to dismiss, namely the difficult economic
conditions, which made the situation so desperate that the only way
of saving the business was to propose stringent reductions in pay
and conditions. However it was not reasonable for the company to
expect an employee to take a pay cut, so the dismissal was
unfair.

The company appealed to the Employment Appeal Tribunal (EAT)
which overturned the tribunal's decision and made several
helpful points for employers facing this situation.

The test the Tribunal had applied in assessing whether the
change was reasonable was wrong – it was not necessary
for an employer to be in desperate straits before it could act
reasonably in imposing a pay cut.

Secondly, the Tribunal had gone wrong by assessing the
reasonableness of the employer's decision to dismiss by asking
what it was reasonable for the employee to have done in the
circumstances. The question it should have asked was what it was
reasonable for the employer to do. It may well be that the decision
of the employer, in order to be reasonable, will take account of
the employee's views. However this is very different from
saying that the decision depends upon what the employee
thinks.

The Tribunal gave as one of its reasons for rejecting the
employer's approach as reasonable, that it lacked
'cogency'. The EAT did not agree. The business faced what
the Tribunal accepted were trading difficulties and was seeking to
reduce its costs. Furthermore, it was not unreasonable to try to
ensure that all members of the workforce were on the same pay
scales, rather than one employee being paid more simply because he
had refused to accept a cut that all the others were prepared to
take.

With regard to fairness, assessing this might include
considering for example, overall fairness such as management
proposing to cut workers' pay, but not its own. It might also
involve considering whether or not there were other cost saving
measures that might also have been appropriate.

In Slade v TNT (UK) Ltd, TNT wanted to discontinue a
bonus scheme which incentivised employees to meet certain deadlines
when sorting goods at its delivery hubs. The scheme, which had been
introduced in 1983, was discontinued for new joiners from 2005; in
2009, TNT began negotiations with the union to discontinue it for
current employees as well. After discussions over several months
(and several ballots), TNT wrote to the workforce to explain its
position. It made a final offer to 'buy out' the value of
the bonus in return for employees' agreement to change their
terms and conditions. If that was rejected, employees would be
issued with contractual notice to terminate their employment. The
offer was rejected and the employees received contractual notice.
They were then offered re-engagement on the expiry of their notice
period, on the same terms and conditions but without the specific
bonus scheme and without the buy-out bonus.

The Tribunal considered that TNT had established 'some other
substantial reason' for the dismissal (namely, one which it
reasonably believed was a sound business reason) and went on to
consider whether the dismissal was 'fair', seeking to
balance the advantages to the business against the effect on the
employees. They concluded that, taking into account its previous
engagement in negotiation, TNT's approach was wholly
reasonable.

The employees appealed to the EAT which rejected the main
arguments in their appeal (having taken the Garside decision into
consideration):

The employees had emphasised the severe impact of this pay cut
upon the workforce and suggested that the Tribunal had failed to
engage with this. The EAT disagreed. The Tribunal had commented
that both parties had acted reasonably in the circumstances, but
that its focus must be the reasonableness of TNT's conduct.
This did not mean that the Tribunal had not undertaken a proper
balancing exercise between the employer and the employees.

The employees had also argued that it was not equitable for TNT
to withdraw the offer of a 'buy out' lump sum when they
offered re-employment. If TNT could afford to mitigate the impact
of the change before terminating the contracts, they argued, it was
inequitable for it not to do so after terminating the contracts.
The EAT did not agree that the only reasonable approach would have
been for TNT to have offered re-engagement on terms including the
lump sum. On the contrary, the lump sum had been offered to secure
a benefit to TNT (agreement to the changes without risk of
industrial action or litigation). When it was unable to obtain that
agreement, it was reasonable to hold back the lump sum (not least
as it could then use this to address any threatened
litigation).

Practical tips

Both cases show that the law give employers a wide margin within
which to take business decisions to make amendments to pay and
bonuses, provided that they implement these in a reasonable way
(that would include acting reasonably over withdrawing an incentive
payment). It is not necessary for the survival of the business to
depend on the change and the focus is on the reasonableness of the
employer – not the reasonableness of the employee's
perspective. Consultation is critical to reasonableness –
in both these cases the employer was able to demonstrate that there
had been extensive dialogue with the workforce.

Employees are also likely to have an uphill struggle in cases
where an overwhelming majority of the workforce accept the
change.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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